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I found out about the 3L-R pattern from an article in Traders.com (a printed magazine, not the website) and according to the author Paolo Pezzutti, it's based on the work
of Michael Harris.

The article suggests using a 7% profit target and 7% stop loss, which I tested. I also tested placing a stop at the other end of the pattern (for an upward breakout, for example,
it would be a penny below the pattern's lowest low). One can infer that 3L-R means three lows and a reversal, which aptly describes the four-bar pattern.

Important Bull Market Results for 3L-R

The above numbers are based on hundreds of perfect trades as of 2/26/2013. See the glossary for definitions.

* Based on the trend high, not the ultimate high. See text.

** Based on the average rise compared to other small patterns with upward breakouts in a bull market

3L-R Identification Guidelines

Characteristic

Discussion

4 bars

The pattern is composed of four bars, three lows and a reversal bar.

Lower lows

Look for two consecutively lower lows (using 3 bars) on the daily chart. It doesn't matter what the high prices of these bars look like, only that
each low is consecutively lower than the prior low.

Higher high

The last bar in the pattern has a high that is above the first bar in the pattern. It doesn't matter at what price the low is on this bar.

3L-R Trading Tips

Trading Tactic

Explanation

Continuation

The pattern acts as a continuation pattern 53% of the time. In other words, the pattern fails more often than it works since it's supposed to act as a reversal.

Continuation

3L-Rs acting as continuations outperform those acting as reversals of the short-term trend. That means look for price to rise leading into the 3L-R (gains averaged
9% (continuations) versus 8% for reversals. The results were the same in bear markets.

Buy

Buy at the open the day after the last bar in the pattern.

Measure rule

The 3L-R fulfills the measure rule 56% of the time (bull market). That is, measure the height of the pattern and add it to the high price to get an
upward target.

3L-R Performance Statistics

For the following statistics, I used 1,242 stocks, starting from December 1989 to February 2013, but few stocks covered the entire range. All stocks had a minimum price of $5.
Since samples were so numerous, I chose one of every four patterns.
There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009.
Everything outside of those dates represents a bull market.

For each 3L-R, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days
(21 days total) each, before the 3L-R and the same peak/valley test after the 3L-R. The closest valley or peak before the 3L-R
is where the trend began. The closest peak or valley after the 3L-R is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the
3L-R pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the pattern ended to the nearest trend peak or trend valley.

3L-R Performance and Failure Rates

Table 1: Performance and Failure Rates

Market

5% Failure

Average Rise

Bull

38%

9%

Bear

34%

9%

Table 1 lists the failure rates, sorted by market condition along with the average rise. Since the 3L-R is supposed
to act as a reversal of the downward trend, I assumed an upward breakout (upward move).

A failure occurs when the stock fails to climb more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the 3L-R. The highest failures occur in a bull market: 38% fail
to rise at least 5%. The average rise is just 9%.

3L-R Measure Rule

Table 2: Measure Rule Performance

Market

Success

Bull

56%

Bear

47%

Table 2 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to rise.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target.

The best performance of the measure rule occurs in a bull market, with 56% of patterns reaching their target.

3L-R Trading Performance

Table 3: Testing the 3L-R

Market

Bull

Bear

Net profit/loss

$75.93

$(60.33)

Wins

57%

47%

Winning trades

10,908

2,523

Average gain of winners

$705.00

$719.48

Losses

43%

53%

Losing trades

8,356

2,826

Average loss

($745.26)

($756.53)

Average hold time (calendar days)

26

14

Table 3 shows the performance based on 24,613 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest,
fees, slippage and so on.

The results are sorted by bull or bear market. The trades used the same setup as listed in 3L-R Performance Statistics.
This test bought a stock at the open the day after the pattern completed. If the opening price
was unavailable (many from the 1990s were 0), then I assumed a penny above the top of the pattern as the entry price. If the open was higher than the buy stop, the opening price was used.

A position was sold if the stock climbed at least 7% above the buy price. Again, if the opening price was higher than the target price, I used the open otherwise
I used the target price. A stop was placed 7% below the buy price.

For example, in a bull market, the net gain was $75.93 for all trades. The method won 57% of the time and there were 10,908 winning
trades. The average gain of winning trades was $705.00.

Forty-three percent, or 8,356 trades were losers. They lost an average of $745.26.

The average hold time was 26 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

3L-R Trading Performance With Pattern Stop

Table 4: Testing the 3L-R with Pattern Stop

Market

Bull

Bear

Net profit/loss

$43.76

$(39.44)

Wins

43%

44%

Winning trades

8,263

2,338

Average gain of winners

$702.98

$715.46

Losses

57%

56%

Losing trades

11,127

3,025

Average loss

($445.78)

($622.91)

Average hold time (calendar days)

15

10

Table 4 shows the results of 24,753 trades, but this time, a penny below the bottom of the 3L-R pattern was used as a stop instead of a 7% stop.

For example, in a bull market the net gain was $43.76 for all trades. The method won 43% of the time and there were 8,263 winning
trades. The average gain of winning trades was $702.98.

Fifty-seven percent, or 11,127 trades were losers. They lost an average of $445.78.

The average hold time was 15 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses dropped dramatically, especially in a bull market.
However, the win/loss ratio suffered and that impacted the bull market net gain.

3L-R Trading Example

The figure shows a 3L-R pattern in 3M (MMM) on the daily scale.

The 3L-R looks like the inset with three lower lows followed by a high above the first high in the 3L-R.

The four bar pattern ends the day before A. Buy at the open at A, which is at a price of $94.34. The target is 7% above this, or $100.94.

The stock rises and hits the sell target as shown in the chart, at C.

A stop is placed 7% below the open, or 87.74 (not shown).

If the pattern stop method were used, the red line at B, which is a penny below the bottom of the 3L-R, would serve as the stop location.